What Not to Do During Mortgage Preapproval: 12 Key Mistakes to Avoid
If you’re preparing to buy a home, securing a mortgage pre approval is one of the most important steps you’ll take. It shows sellers and real estate agents that you’re serious, and it gives you a clear idea of how much you can borrow. Most importantly, it positions you as a strong buyer, allowing you to make competitive offers with confidence. However, as crucial as this step is, there are many mistakes that can jeopardize your pre approval—and even derail your homebuying journey entirely.
Mortgage lenders take a detailed look at your financial stability, credit history, employment, and overall financial health when considering your preapproval. Even if you meet all the basic qualifications, making the wrong financial moves during the preapproval process can raise red flags and cause lenders to reconsider. Understanding what not to do during mortgage preapproval is just as critical as understanding what you should do.
In this guide, we’ll walk you through 12 common mistakes that could derail your mortgage preapproval. By avoiding these pitfalls, you can increase your chances of getting preapproved and pave the way for a smoother homebuying experience.
Don’t Take on New Debt or Open New Credit Lines
One of the biggest mistakes you can make during the mortgage preapproval process is taking on new debt. Whether it’s financing a new car, purchasing expensive furniture on credit, or opening a new credit card, these actions can significantly impact your debt-to-income (DTI) ratio—a key factor that lenders use to determine how much you can borrow.
Your DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders prefer a lower DTI ratio because it shows you have enough income to comfortably handle your mortgage payments in addition to your existing debts. Taking on new debt increases your DTI ratio, which can make you appear riskier to lenders. In some cases, this could cause you to exceed the DTI threshold that lenders are comfortable with, leading to a denied preapproval or less favorable loan terms.
In addition to impacting your DTI ratio, taking on new debt can also lower your credit score, which is another important factor that lenders consider during preapproval. If your credit score drops significantly, it could lead to higher interest rates or even disqualify you from getting preapproved.
How to avoid this mistake:
- Wait until after your mortgage has been fully approved and you’ve closed on your home before making any large purchases.
- Avoid applying for new lines of credit or taking out new loans, even if they seem like minor commitments.
- Keep your spending habits consistent and avoid making any big financial changes during the preapproval process.
Don’t Change Jobs or Employment Status
Job stability is one of the most important factors that lenders look at when determining whether to approve a mortgage. Lenders want to see that you have a steady, reliable income that can support your mortgage payments. Changing jobs, switching to a part-time position, or becoming self-employed during the preapproval process can raise concerns for lenders—even if your new job offers a higher salary.
Lenders prefer borrowers with stable employment histories because they see them as less risky. A sudden job change or irregular income could signal to lenders that you may struggle to make your mortgage payments, which could jeopardize your preapproval. If you’re self-employed or work in a commission-based role, lenders will likely require additional documentation to verify that your income is consistent and reliable.
In some cases, a job change may not affect your preapproval if you can demonstrate that your income remains steady or has increased. However, even with a higher income, the transition period between jobs or inconsistent paychecks could raise red flags for lenders.
How to avoid this mistake:
- If possible, avoid changing jobs or employment status during the preapproval process.
- If you must change jobs, make sure to provide your lender with all relevant information, including offer letters, proof of income, and any documentation that shows your new job will provide consistent income.
- For self-employed borrowers, ensure that your income is well-documented and that you can demonstrate a stable earnings history over at least two years.
Don’t Make Large Bank Deposits Without Documentation
Lenders closely examine your bank statements and financial history as part of the preapproval process. Any large, unexplained deposits into your account can raise red flags. Lenders want to ensure that your funds are legitimate and that you’re not using borrowed money or other risky financial sources to fund your down payment or closing costs.
If you receive money from a family member or friend to help with your down payment, you’ll need to provide a signed “gift letter” stating that the funds are a gift and not a loan. Lenders may also require additional documentation, such as withdrawal records or bank statements, to verify the source of the funds.
Unexplained deposits can create delays in the preapproval process and, in some cases, could lead to a denied loan application if lenders suspect that the funds come from undisclosed debts or other questionable sources.
How to avoid this mistake:
- If you receive financial help for your down payment, be prepared to provide a signed gift letter from the donor stating that the funds are a gift and not a loan.
- Keep detailed records of any large deposits and be ready to provide documentation to your lender.
- Avoid making large, unexplained deposits into your bank account in the months leading up to your mortgage application.
Don’t Ignore Your Credit Score or Miss Payments
Your credit score plays a critical role in the mortgage preapproval process. Lenders use your credit score to assess your financial responsibility and determine whether you qualify for a mortgage. Even a small drop in your credit score can impact your chances of getting preapproved, and a significant drop could result in a denial.
One of the most common ways borrowers harm their credit during the preapproval process is by missing payments on credit cards, loans, or other financial obligations. A missed payment can lower your credit score and signal to lenders that you may not be able to manage your mortgage payments responsibly.
Most lenders require a minimum credit score of 620 for conventional mortgages, but higher scores generally qualify you for better loan terms and lower interest rates. Missing payments or letting your credit utilization ratio rise too high during the preapproval process can lower your score and raise concerns for lenders.
How to avoid this mistake:
- Continue making all your payments on time, including credit card payments, loans, and utility bills, during the preapproval process.
- Monitor your credit score regularly to ensure it remains stable and avoid any surprises.
- Avoid taking on new debt or increasing your credit card balances during the preapproval process.
Don’t Co-Sign Loans for Someone Else
While co-signing a loan for a friend or family member may seem like a generous act, it can have serious consequences for your mortgage preapproval. When you co-sign a loan, you become legally responsible for the debt. This increases your overall debt liability, which can raise your DTI ratio and impact your preapproval status.
Lenders will include co-signed loans as part of your debt obligations, even if the person you co-signed for is making all the payments on time. If they miss payments or default on the loan, it could hurt your credit score and jeopardize your chances of getting preapproved for a mortgage.
How to avoid this mistake:
- Politely decline any requests to co-sign loans while you’re in the mortgage preapproval process.
- If you’ve already co-signed a loan, make sure all payments are being made on time and monitor the account closely to avoid any negative impact on your credit.
Don’t Close Credit Card Accounts
Closing unused credit card accounts might seem like a smart financial move, but doing so during the mortgage preapproval process can actually harm your credit score. When you close a credit card account, it reduces the amount of available credit you have, which increases your credit utilization ratio—the percentage of your available credit that you’re using. A higher credit utilization ratio can lower your credit score, even if you haven’t taken on new debt.
Additionally, closing long-standing credit accounts can shorten your credit history, which is another factor lenders consider when assessing your creditworthiness. A shorter credit history may signal to lenders that you have less experience managing credit, which could impact your preapproval.
How to avoid this mistake:
- Keep all credit card accounts open until after your mortgage has been approved and finalized.
- Use your credit cards responsibly by keeping balances low and paying them off in full each month.
Don’t Overlook Your Debt-to-Income Ratio
As previously mentioned, your debt-to-income (DTI) ratio is one of the most important factors that lenders consider when determining your mortgage eligibility. Even if you have a high credit score and stable income, a high DTI ratio can signal to lenders that you may struggle to make your mortgage payments.
Many lenders prefer a DTI ratio of 43% or lower, meaning that your total monthly debt payments should not exceed 43% of your gross monthly income. If your DTI ratio is too high, you may need to pay down existing debts before applying for preapproval.
How to avoid this mistake:
- Calculate your DTI ratio before applying for mortgage preapproval to ensure it’s within the acceptable range.
- If necessary, pay down credit card balances, loans, or other debts to lower your DTI ratio.
- Avoid taking on new debts that could raise your DTI ratio before or during the preapproval process.
Don’t Forget to Shop Around for Lenders
One of the most important steps in the preapproval process is shopping around for lenders. Mortgage rates, fees, and terms can vary significantly from one lender to another, and getting multiple preapproval offers allows you to compare rates and terms to ensure you’re getting the best deal possible.
By obtaining preapproval from several lenders, you’ll also be in a stronger position to negotiate with sellers and make competitive offers. Having multiple preapproval letters gives you more flexibility and allows you to act quickly when you find the right home.
How to avoid this mistake:
- Get preapproval from at least three different lenders to compare rates and terms.
- Take your time reviewing each offer and consider factors beyond just the interest rate, such as closing costs, loan fees, and other charges.
- Don’t feel pressured to accept the first offer—shopping around can save you thousands of dollars over the life of your loan.
Don’t Drastically Change Your Spending Habits
Lenders look for consistency when reviewing your financial behavior. A sudden spike in spending or drastic changes in your spending habits can raise concerns for lenders and lead them to question whether you’ll be able to manage your mortgage payments. Large, unnecessary purchases or maxing out your credit cards can make you appear financially unstable, which could impact your preapproval.
How to avoid this mistake:
- Stick to your usual spending habits and avoid making large purchases during the preapproval process.
- Create a budget to ensure you’re staying within your means and not overspending.
- Keep your credit card balances low and pay them off in full each month.
Don’t Pay Off Large Debts Without Consulting Your Lender
Paying off debt is generally a good thing, but doing so without consulting your lender can sometimes have unintended consequences. For example, paying off a large loan or credit card balance might reduce your liquid cash reserves, which lenders consider when determining whether you have enough money to cover your down payment and closing costs.
Additionally, paying off a large debt could affect your DTI ratio and overall financial profile, prompting lenders to reassess your preapproval. In some cases, paying off debt could help, but it’s essential to talk to your lender first to understand how it might impact your application.
How to avoid this mistake:
- Before making any large debt payments, consult with your lender to ensure it won’t negatively impact your preapproval.
- Make sure you have enough liquid savings to cover your down payment, closing costs, and other expenses before paying off large debts.
Don’t Rush the Preapproval Process
While it’s natural to be excited about buying a home, rushing through the preapproval process can lead to mistakes that could delay or derail your mortgage application. Missing documents, errors in your financial information, or failing to double-check your application can all result in a longer approval process or even a denial.
Taking the time to carefully gather and review all the necessary documentation, including pay stubs, tax returns, bank statements, and other financial records, will help ensure a smooth preapproval process. It’s also essential to work closely with your lender to address any questions or concerns that arise during the process.
How to avoid this mistake:
- Take your time when preparing your preapproval application and double-check all documents for accuracy.
- Ensure you have all required financial documentation ready before submitting your application.
- Work closely with your lender to address any questions or concerns early in the process.
Don’t Assume Preapproval Guarantees Final Approval
Receiving a mortgage preapproval letter is an exciting milestone, but it’s important to remember that preapproval is not the same as final approval. Preapproval indicates that a lender has reviewed your financial information and tentatively agreed to offer you a loan, but final approval comes after you’ve found a home and your lender has completed a thorough review of your finances and the property you’re purchasing.
Changes in your financial situation—such as a drop in your credit score, taking on new debt, or changing jobs—can still impact your ability to get final approval for the mortgage. Lenders will continue to monitor your financial behavior during the time between preapproval and closing, so it’s important to maintain stability and avoid any major changes.
How to avoid this mistake:
- Maintain financial stability and avoid major changes to your credit, employment, or debt situation between preapproval and closing.
- Stay in close communication with your lender to ensure there are no surprises during the final approval process.
- Be proactive in addressing any financial issues that arise after preapproval to avoid complications at closing.
Conclusion:
Navigating the mortgage preapproval process requires careful financial planning and attention to detail. By avoiding these common mistakes—such as taking on new debt, changing jobs, or ignoring your credit score—you can improve your chances of getting preapproved and ensure a smoother path to homeownership. Remember, preapproval is just one step in the homebuying journey, and maintaining financial stability throughout the process is key to securing your dream home.
Take the time to review your financial situation, consult with your lender, and avoid making any sudden changes that could raise concerns. With the right approach, you’ll be well on your way to final mortgage approval and closing on your new home.
